Ethical Decision Making on Various Managerial Accounting Issues

Topics: Cost accounting, Management accounting, Rate of return Pages: 20 (6048 words) Published: September 24, 2011

Vol. 2 · Number 2 · 2004

Ethical Decision Making on Various Managerial Accounting Issues Arnold Schneider* Abstract This study examines five managerial accounting issues that have ethical implications. These issues are based on situations described in managerial accounting textbooks. To induce truthful responses, an approach called the randomized response technique is used. With this technique, estimates are obtained for responses to sensitive questions relating to the five issues. Results ranged from 9 percent to 51 percent of participants making decisions that are at least questionable from an ethical perspective. Key Words

Many issues in the area of managerial accounting have ethical implications. This is recognized by The Institute of Management Accountants, which has provided ethical guidance by developing Standards for Ethical Conduct for Management Accountants (IMA, 1983). These standards deal with issues involving competence, confidentiality, integrity, and objectivity. Managerial accounting textbooks are replete with discussions of issues that have ethical implications. These issues range from performance evaluation to cost reimbursement and the decisions encompass managerial ones such as amount of production as well as accounting ones such as cost allocations. While the potential for managerial manipulation or unethical conduct is often mentioned, rarely is evidence provided about the actual occurrence of such behaviour. The purpose of this study is to provide some evidence about behaviour involving ethical issues in the context of five specific decision areas found in the realm of managerial accounting. The five issues chosen were based on encounters with them while teaching managerial accounting.

Accounting Ethics Randomized Response Technique Management Accounting

Literature on Ethics in Managerial Accounting
Managerial accounting research has addressed various ethical issues. Rogerson (1992) examined overhead allocated to contracts and demonstrated that firms have incentives to engage in pure waste by padding direct labour usage on contracts with cost-based revenues. Sayre, Rankin, and Fargher (1998) investigated the effects of promotion incentives on the selection of investment projects by managers and found that the managers’ investment decisions served their own self-interests at the expense of the owners’ interests. A number of studies on budgeting have shown that when a subordinate’s information is used as 29

* College of Management, Georgia Institute of Technology


Vol. 2 · Number 2 · 2004

a basis for his performance evaluation, the subordinate has incentives to misrepresent resource requirements or production capabilities (e.g., Young, 1985; Waller, 1988; Chow, et al, 1988; Nouri, 1994; Stevens, 2002). Many studies have provided evidence on how managers manipulate earnings to maximize their compensation or enhance their performance evaluation (e.g., Healy and Whalen, 1999; Nelson, et al, 2003). While these manipulations usually involve accounting choices, some involve managerial decisions such as the research and development spending decisions examined by Dechow and Sloan (1991).

“if the company uses the absorption costing approach, a manager might be tempted to produce unneeded units just to increase reported operating income.” An example of how profit was manipulated in this manner is provided by Kaplan and Atkinson (1998, p. 504), who mention a case where “the division manager had greatly increased production in quarters 2 and 3, with excess production accumulating as finished goods inventory. The much higher rates of production enabled period costs to be absorbed into inventory.” The first research question in this study addresses the issue of whether participants would decide to overproduce in order to increase profits. The actual question asked, which can be found in Situation #1 of the Appendix, was “Would you decide to overproduce in order...
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